We lower our FY19 net profit forecast by 16% due to a potential decline in cargo traffic.

2MFY19 cargo traffic fell by 1.9% y-o-y. A potential reduction in exports to China due to the US’ trade protectionism and gradual economic slowdown could also lead to lower air cargo demand and revenue.

We lower our fair value from S$12.60 to S$11.90 as we reduce P/B from 1.0x to 0.95x. Downgrade SIA to HOLD.

We believe that these are causes of concern for weakening cargo traffic for FY19, which will fall below our expectations of a 5% increase in cargo traffic.

Potential decline of exports to China could slow recovery of SIA’s cargo traffic

In view of increased trade protectionism from the US and tentative signs of economic slowdown in China, exports to China are expected to decline.

China is Singapore’s largest export market, having accounted for 18% of NODX in 2017, and reduced exports to China could potentially lead to lower NODX. NODX to China has already been on a downtrend. For the past year, SIA’s cargo traffic had a positive correlated to NODX and a potential decline could slow down recovery for SIA’s cargo traffic.

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